STAFF NEWS & ANALYSIS
Shrinking Money Supply Dampens Inflation Fears
By Staff News & Analysis - September 23, 2009

The soft economy and weak bank lending all but ensure the Federal Reserve will stick with its stimulative policies. The Federal Reserve stands accused of risking high inflation by recklessly printing too much money. But as Fed rate setters meet in Washington on Sept. 22-23, they won't see an excess of money sloshing around. Just the opposite. Paradoxically, the latest statistics show a shrinkage in the broadest measures of money. The upshot: Members of the rate-setting Federal Open Market Committee are likely to announce on the afternoon of Sept. 23 that they are sticking with their stimulative monetary policy. Inflation, while always a risk, remains more of a long-term threat. The economy is so soft and the banking system is so weak that deflation remains a clearer and more present danger. To fight the recession, the Federal Reserve has vastly increased the amount of reserves that banks have on deposit at the Fed. In a healthy economy, banks would take advantage of those reserves to increase their lending. Instead, they're hoarding the money, so the Fed's loose monetary policy isn't resulting in more loans. It's the process of lending that expands the amount of money in the economy. – BusinessWeek

Dominant Social Theme: More money is needed.

Free-Market Analysis: This article, excerpted above, is yet another reason, in our humble opinion, why McGraw Hill is trying to unload BusinessWeek, reportedly at one point for a buck. With all the commentary now on the Internet and even in the mainstream press about free-market economics it would seem to us that BusinessWeek would at least try to moderate the vocabulary it uses. But no, the writers of this particular piece plunge along merrily, garbling terms and referring to "inflation" when they mean "price inflation."

Inflation by every estimate (except Keynes') has to do with the quantity of money. If someone produces a widget and then another, he may fairly be said to have inflated the supply of widgets. This is a correct use of the term. But if one supplies widgets to a store and the store does not sell the widgets then, using Keynesian logic, the supply of widgets remains un-inflated. This is nonsense. The widgets have been created and shipped. They simply haven't been brought home by a consumer.

In a less polite era this sort of tendentious logic would be called what it is. Yet such is the sway of central banking and its influence on the mainstream press that virtually a whole new vocabulary and logic-set has been developed for it. When it comes to the private sector, an outfit like BusinessWeek is merciless. Every missed projection is examined, every nook and cranny of potential corruption is fair game. Yet when it comes to the endless errors of central banking, the mainstream press, even at this late date, won't bend an inch. BusinessWeek, once the gold standard of the mainstream financial press, is especially egregious in this regard. Its articles are as well edited as they are short on critical economic thinking. Here's some more from the article:

Paul Ashworth, senior U.S. economist for the economic consulting firm Capital Economics, says it's "disconcerting" that in August the broadest measure of money fell at an annual rate of 2.2%. That rate comes from comparing the amount of money in the three-month period of June through August to the previous three months. This broadest money measure, known as M3, is no longer officially published by the Fed but is tracked by private forecasters. It includes cash, checking and savings accounts, certificates of deposit, savings and loan deposits, and money-market funds.

In an interview on Sept. 21, Ashworth said the new information "basically legitimizes the approach the Federal Reserve has taken" by making it clear that, so far anyway, there's little risk of inflation breaking out from too much money.

So what can be expected from the Fed meeting? The rate setters are highly likely to leave the federal funds rate at its historic low of just zero to 0.25%. Internally there will probably be a vigorous discussion about when to start raising rates, but in its public statement the Open Market Committee is likely to reaffirm its commitment to keeping the federal funds rate at rock bottom for a considerable, unspecified amount of time.

Of course there will be a vigorous discussion about when to raise rates. Everyone will have different ideas about the timing because no one knows. This is another lacunae in the article – that central bankers can figure out the optimal season to fix the price of money (that is of course what they are doing). In one short article BusinessWeek continues to mis-define inflation and attributes powers to central banks that they very evidently don't have. The article conveniently glosses over the culpability borne by the American central bank for keeping rates so low in the first place.

After Thoughts

We don't expect a history of central banking and the policies and vocabulary of the American Federal Reserve every time that BusinessWeek writes an update on central banking policy. But a little bit of balance, in this Internet day and age, would be nice. This is a good example in fact of how Western censorship works, by omission not commission. And that is also the reason you will likely never see the likes of BusinessWeek call for a market based gold and silver standard. That sort of phrase does not exist in the vocabulary of its editorial braintrust.

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